U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ -------
Commission file number 0-10187
PRAB, INC.
(Name of Small Business Issuer in its charter)
Michigan 38-1654849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5944 E. Kilgore Road
P.O. Box 2121
Kalamazoo, Michigan 49003
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (616) 382-8200
--------------------
Securities Registered under Section 12(b) of the Exchange Act
None
Securities Registered under Section 12(g) of the Exchange Act
Common Stock, $.10 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes x No
----- -----
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
The issuer's revenues for its most recent fiscal year were:
$18,237,373.
The aggregate market value of Common Stock held by persons not
"affiliated" with the issuer, based on the average bid and ask price of the
Common Stock as of December 31, 1998, was $3,143,332. For purposes of this
computation, all executive officers, directors and 5% shareholders of the
Company have been assumed to be affiliates. Certain of such persons may
disclaim that they are affiliates of the Company.
As of December 31, 1998, the registrant had outstanding 1,757,339
shares of Common Stock, $.10 par value.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Parts of Form 10-KSB Into Which
Identity of Document Document is Incorporated
- -------------------- -------------------------------
Definitive Proxy Statement with Part III
respect to the 1999 Annual Meeting
of Shareholders of the Company.
Transitional Small Business Disclosure Format:
Yes [ ] No [ X ]
2
<PAGE>
PART I
Item 1. Business
General
The Company is a Michigan corporation organized in 1961. The
Company's operations consist of designing and manufacturing conveyors, metal
scrap reclamation systems and bulk material handling equipment. The Company
sells its products worldwide through a network of factory sales engineers,
manufacturers' agents, and distributors. These products are used in a variety
of manufacturing processes to reduce labor costs, increase productivity,
improve quality and save materials and energy resources.
Overview
The Company designs and manufactures complete metal scrap
reclamation systems which it sells to die casting, metal stamping, general
metal working, and other industries. These systems reduce labor,
manufacturing and transportation costs associated with metal scrap disposal,
reclaim cutting fluids, and increase the value of metal scrap. The Company's
scrap metal reclamation systems are priced from $50,000 to $1,500,000 and
range from a single machine to a complex group of machines including
conveyors, crushers, centrifuges, and related equipment.
Reclamation systems are specifically designed for each customer and
in general are used to collect and transfer metal scrap, crush the scrap into
a more convenient chip size for handling, clean the scrap of fluids and other
impurities, and reclaim oil used as a machining coolant during the
manufacturing process.
The Company also designs and manufactures, to meet customer
specifications, for prices ranging from $3,000 to $100,000, stand-alone
conveyors for transporting aluminum, brass, cast iron and steel scrap. These
conveyors, include HarpoonTM, drag, tubular, oscillating, screw, hinged steel
belt, magnetic, and pneumatic models.
The Company also sells conveyors and systems under the trade name of
HapmanTM, which are used primarily to transport bulk materials, such as
powders and chemicals bag. These tubular, flexible screw (HelixTM), and
pneumatic conveyors, bulk bag unloaders, and bag dumping stations (also known
as "bulk material handling equipment") are used in the chemical,
pharmaceutical, food, plastics and other processing industries and sell in
the price range of $2,000 to $100,000.
Sales
The Company's business is not seasonal; however, fluctuations in
sales are common due to large system orders, which is typical of the capital
equipment industry. Foreign sales and license fees accounted for 11%, 17%,
and 6% of the Company's net sales for fiscal years 1998, 1997 and 1996,
respectively. The Company's sales are not dependent on one or a few major
customers.
Backlog
The Company's backlog of orders as of October 31, 1998 and
October 31, 1997 is set forth below. The Company believes all backlog orders
outstanding as of October 31, 1998 will be filled within one year.
3
<PAGE>
<TABLE>
<CAPTION>
Increase
As of As of (Decrease)
October 31, October 31, From 1997
1998 1997 to 1998
----------- ----------- ---------
<S> <C> <C>
$3,174,000 $4,588,000 (31%)
</TABLE>
Marketing and Distribution
The Company maintains demonstration equipment in its factory
applications laboratory.
The Company generates inquiries through advertising, trade shows,
trade releases, and customer referrals. Sales of all the Company's products
are made by factory sales engineers, manufacturing agents, distributors and
licensees.
Engineering and Design Development
The Company's engineering and design personnel develop and modify
its products to meet the customers' specifications. Most of the Company's
products require a certain amount of custom engineering or design work. The
Company does not engage in substantial research and development activities.
Manufacturing
The Company fabricates and assembles the primary components of its
products. The principal materials used in all of the Company's products are
bar and sheet metal, stampings, castings, machined parts, electrical
components, completed controls and finished goods. All of these materials are
readily available from a variety of sources.
Warranty expense for the past three years has been approximately
$393,000, $525,000 and $497,000 for 1998, 1997 and 1996, respectively.
None of the Company's principal products require government approval
and compliance with governmental regulations is not a significant factor in
the Company's business. The costs and effects of compliance with
environmental laws is not a significant factor in the Company's business.
Patents and Trademarks
The Company owns numerous domestic and foreign patents and has
developed technology and special skills relating to metal scrap reclamation
systems, conveyors, and bulk material handling equipment. While the aggregate
protection afforded by these patents is of value, the Company does not
consider that the successful conduct of any material part of its business is
dependent upon such protection. The Company holds registered trademarks for
the names "Prab", "Hapman", "Harpoon", and "Helix".
4
<PAGE>
Competition
The Company competes with many domestic and foreign firms, some of
which are large, diversified companies with financial, engineering, technical
and other resources greater than those of the Company. The Company's products
compete with similar products on the basis of price, design and quality.
Several large companies manufacture metal scrap reclamation systems and
conveyors and no reliable information is available as to the number of such
companies, the volume of their sales, or the total sales of any particular
product. However, the Company believes that it is one of the leading sellers
of large metal scrap reclamation systems.
The Company also believes it is a leading manufacturer of single
unit conveyors with its primary competitor being Mayfran International, a
division of Tomkins Industries, Inc. Competition for the Company's Hapman
conveyor products include a number of public and private companies.
Employees
As of December 31, 1998, the Company employed 98 persons, 94 of
which persons were employed on a full-time basis. 45 of the employees are
covered by a collective bargaining agreement with the United Steelworkers of
America, AFL-CIO-CLC. The three-year contract with the Union expires on
October 31, 2001.
Item 2. Properties
All of the Company's offices and manufacturing facilities are
located in Kalamazoo, Michigan, in a 72,000 square foot building owned by the
Company
The Company's facility has been used for conveyor manufacturing
since the early 1960's. The facility's office space is more than adequate for
the Company's present level of business, and the manufacturing capacity is
under-utilized with a full first shift operation and a small second shift
operation. The facility is in good operating condition. The Company's bank
holds a mortgage on the facility to secure payment of the Company's
obligations to it.
Item 3. Legal Proceedings
The Company is subject to claims and lawsuits arising in the
ordinary course of business. In the opinion of management, all such pending
claims and lawsuits are either adequately covered by insurance or, if not
insured, will not have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
5
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The following table sets forth the range of high and low bid
information for the Company's two most recent fiscal years:
<TABLE>
<CAPTION>
1998
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Stock Price (bid)
High 3 5/8 3 3 1/16 3 1/4
Low 1 3/4 2 1/2 2 5/8 2 5/8
<CAPTION>
1997
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Stock Price (bid)
High 1 13/16 1 1/2 1 3/8 1 7/8
Low 1 1/2 1 3/8 1 1 1/4
</TABLE>
The Common Stock is regularly quoted on the OTC Bulletin Board
(OTCBB). The above bid prices are quotations reflecting inter-dealer prices,
without retail markup, markdown or commissions, and may not necessarily
represent actual transactions. At December 31, 1998, there were approximately
1,062 record holders of the Common Stock.
The Company has paid no dividends on its Common Stock. The payment
of dividends in the future will be dependent upon the financial condition,
capital requirements, earnings of the Company and such other factors as the
Board of Directors may deem relevant.
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview of Recent Significant Events
Net sales in 1998 increased 8% and new order bookings decreased 7%
when compared to 1997. Operating profits in 1998 decreased by $28,657
resulting primarily from higher cost of sales and not raising prices to
customers.
In November 1997, the Company paid all subordinated debt holders in
full using a combination of cash on hand and its bank line of credit. The
payment lowered interest expense in 1998 as the Company was paying 12% on the
subordinated debt versus commercial market rates on the line of credit. Total
debt repayment in 1998 amounted to $1,290,000.
6
<PAGE>
1998 Compared to 1997
Net sales increased 8% in 1998 to $18,237,000 from $16,915,000 in
1997. Part sales were 18% of total sales versus 20% a year ago.
The Company's business is highly competitive and very sensitive to
price. The increase in net sales in 1998 was primarily due to increased sales
of the "Prab" line of conveyors and chip processing systems. The actual sales
fluctuation due to price is not known.
Cost of sales compared to net sales increased to 61% in 1998 from
59% in 1997. Selling, general and administrative expenses were 30% of net
sales in 1998 and 31% in 1997.
Interest expense decreased as a result of lower debt. The Company's
12% Subordinated Notes were repaid by the Company in November 1997. Since the
notes were carried at a discount, the payoff amount of this debt exceeded its
carrying amount and an extraordinary loss on the extinguishment of the debt
was reported. The effect of this transaction for the year ended October 31,
1998 was to decrease income by $77,512, net of the income tax benefit of
$39,931.
Trends
The Company's current backlog of orders is lower than the prior year
due to lower booking levels. Historically, a decline in backlog results in
lower sales and management has projected that sales for the Company will
decrease in fiscal 1999, and such decline will negatively affect earnings.
The extent of the decrease in sales and earnings cannot be accurately
determined at this time and will be affected by the general economy in 1999
and efforts by the Company to increase sales and reduce expenses.
Sales of bulk material handling parts and equipment in fiscal 1998
decreased 4% from 1997 sales. Sales of metal scrap processing conveyors,
parts, and chip systems in fiscal 1998 increased 19% above 1997 sales.
Liquidity and Financial Condition
The Company's primary cash requirements in 1998 were operating
expenses, capital expenditures, debt repayment, and interest payments on
debt.
In fiscal 1998, the Company's operations provided $1,557,000 of cash
and the Company had working capital at the end of the year of $2,260,000
compared to $1,738,000 a year ago. The increase resulted primarily from lower
notes payable, accounts payable, and customer deposits. Capital expenditures
were down from the prior year with $223,000 in 1998 versus $281,000 in 1997.
Other current assets decreased primarily because of a decrease in prepaid
insurance.
The Company had $200,000 outstanding on its $1,670,000 bank line of
credit at October 31, 1998. The line of credit also supported a $6,749 letter
of credit which left a balance of $1,463,251 available to the Company. The
Company believes this financing, combined with cash generated by operations
in 1999, will provide sufficient funds to finance working capital
requirements, capital additions, and debt repayments.
7
<PAGE>
Summary
As described above, the Company believes that sales and earnings may
materially decrease in 1999; however, the Company's net income for 1999 will
be positively impacted by lower interest expense on reduced debt. Excess cash
will continue to be used to reduce debt.
Year 2000 Issue
The Company has been, and is currently, in the process of addressing
a significant issue facing all users of automated information systems. The
problem is that many computer systems that process transactions based on two
digits representing the year of transaction may recognize a date using "00"
as the year 1900 rather than the year 2000, or otherwise not properly process
dates in the year 2000.
The Company has evaluated its products, both past and present, for
year 2000 compliance. None of the products that the Company currently
supplies contain a date function, and therefore, are not affected by the year
2000 problem. While the Company cannot determine with certainty that no
products supplied in the past are affected by the year 2000 problem, the
Company is not aware of any such products which contain a year 2000 defect.
The Company has evaluated its internal systems and, in the opinion
of management, there is no reason to believe that any computer systems or
software used internally by the Company will materially affect its operations
or any transactions with any customer, supplier or business partner, now or
in the future. The Company has also conducted an evaluation of its key
suppliers of goods and services and, in the opinion of management, there is
no reason to believe that any computer systems operated by the Company's
suppliers and business partners will encounter a Year 2000 problem which
would have a material adverse effect on the Company's operations. In
addition, the Company believes that it has alternative sources for all goods
and services presently provided to the Company. In the event that the year
2000 problem causes a disruption of basic services such as utilities or
banking or a sustained disruption of the economy in general, the Company will
be adversely affected. The Company has not adopted any contingency plans
regarding Year 2000 because it does not believe any materially adverse events
are likely to occur for which such plans would be of benefit.
The Company anticipates that its total expenditures to address the
year 2000 problem will not exceed $50,000. This amount does not include the
cost of upgrading the Company's computer system in fiscal year 1998, which
upgrade was undertaken for reasons other than year 2000 concerns. The total
cost of the upgrade was approximately $150,000.
Item 7. Financial Statements
(a) The following Financial Statements are attached hereto in
response to Item 7:
Independent Auditor's Report - Plante & Moran, LLP
Consolidated Balance Sheets - October 31, 1998 and October 31,
1997
Consolidated Statement of Income - Years ended October 31, 1998
and October 31, 1997
Consolidated Statement of Changes in Stockholders' Equity -
Years ended October 31, 1998 and October 31, 1997
8
<PAGE>
Consolidated Statement of Cash Flows - Years ended October 31,
1998 and October 31, 1997.
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting an
Financial Disclosures
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information under the caption "Election of Directors" contained
in the Company's Definitive Proxy Statement filed with the Commission, is
incorporated herein by reference.
Item 10. Executive Compensation
The information under the captions "Executive Compensation", "Option
Grants in Last Fiscal Year", "Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values" and "Compensation of Directors" contained
in the Company's Definitive Proxy Statement filed with the Commission, is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management", contained in the Company's Definitive
Proxy Statement filed with the Commission, is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
The information under the caption "Certain Relationships and Related
Transactions", contained in the Company's Definitive Proxy Statement filed
with the Commission, is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are attached hereto:
Exhibit Description of Exhibit
Number
- ------
3(i). Second Restated Articles of Incorporation of the Company, as
amended, incorporated herein by reference to Exhibit 3(i) of the
Company's Form 8-A/A (Amendment No.1) dated May 25, 1995.
3(ii). By-Laws of the Company as amended incorporated herein by reference
to Exhibit 3(ii) of the Company's Form 8-A/A (Amendment No.1) dated
May 25, 1995.
9
<PAGE>
4a. $77,500 Subordinated Capital Note dated October 31, 1996 from the
Company to Gary A. Herder (except for varying principal amounts, the
terms of Mr. Herder's Subordinated Capital Note are identical to the
terms of all other Subordinated Capital Notes issued by the Company
in the aggregate principal amount of $680,000 on October 31, 1996)
incorporated herein by reference to Exhibit 4a of the Company's Form
8-K dated October 31, 1996.
4b. $1,800,000 Commercial Term Note dated October 31, 1996 from the
Company to FMB-Arcadia Bank (now known as The Huntington National
Bank) incorporated herein by reference to Exhibit 4b of the
Company's Form 8-K dated October 31, 1996.
4c. Security Agreement with Addendum dated October 31, 1996 from the
Company to FMB-Arcadia Bank (now known as The Huntington National
Bank) incorporated herein by reference to Exhibit 4c of the
Company's Form 8-K dated October 31, 1996.
4d. Future Advance Mortgage dated October 30, 1992 from the Company to
FMB-Arcadia Bank (now known as The Huntington National Bank),
together with Amendment to Mortgage dated October 31, 1996
incorporated herein by reference to Exhibit 4d of the Company's Form
8-K dated October 31, 1996.
4e. Addendum to Commercial Term Note dated October 31, 1996 executed
December 4, 1997.
4f. Addendum to Security Agreement dated October 31, 1996 executed
March 9, 1998.
10a. Deferred Compensation and Salary Continuation Agreement between the
Company and Gary A. Herder dated September 13, 1976 incorporated by
reference to Exhibit 19b. of the Company's Form 10-K for the fiscal
year ended October 31, 1987.
10b. Prab Robots, Inc. 1988 Stock Option Plan incorporated by reference
to Exhibit "C" of the Company's Definitive Proxy Statement for the
1988 Annual Meeting.
10c. Registration Rights and Shareholders Agreement, dated October 30,
1992, between the Company and State Treasurer of the State of
Michigan, custodian for certain retirement systems incorporated
herein by reference to Exhibit 4e of the Company's Form 8-K dated
November 13, 1992, as amended by First Amendment to Registration
Rights and Shareholders Agreement dated October, 1994 incorporated
herein by reference to Exhibit 4c. 2 of the Company's Form 10-KSB
for the fiscal year ended October 31, 1994.
21. List of Subsidiaries.
24a. Power of Attorney for William G. Blunt
24b. Power of Attorney for John W. Garside
24c. Power of Attorney for Gary A. Herder
24d. Power of Attorney for James H. Haas
24e. Power of Attorney for John J. Wallace
10
<PAGE>
27. Financial Data Schedule
The Company will furnish copies of the above described Exhibits upon written
request and payment of a fee equal to $20.00 per request, plus $.20 per page
copied, plus postage. All requests for copies of Exhibits should be sent to:
Mr. Robert W. Klinge, Prab, Inc., 5944 E. Kilgore Road, P.O. Box 2121,
Kalamazoo, Michigan 49003.
(b) No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PRAB, INC.
By: /s/Robert W. Klinge
-------------------
Robert W. Klinge
Treasurer
January 28, 1999
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
- -------------------------- Chairman of the January 28, 1999
*John J. Wallace Board and Director
- -------------------------- President, Principal January 28, 1999
*Gary A. Herder Executive Officer,
Principal Financial
Officer, and Director
/s/ Eric V. Brown, Jr. Secretary and Director January 28, 1999
- --------------------------
Eric V. Brown, Jr.
- -------------------------- Director January 28, 1999
*William G. Blunt
- -------------------------- Director January 28, 1999
*James H. Haas
- -------------------------- Director January 28, 1999
*John W. Garside
/s/ Robert W. Klinge Treasurer (Principal January 28, 1999
- -------------------------- Accounting Officer)
Robert W. Klinge
*
By: /s/ Eric V. Brown, Jr. January 28, 1999
----------------------
Eric V. Brown, Jr.
Attorney-in-Fact
12
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report on Form 10-KSB
For the Year Ended October 31, 1998
Financial Statements
Index to Exhibits
Exhibits
PRAB, INC.
(A Michigan Corporation)
5944 E. Kilgore Road
P.O. Box 2121
Kalamazoo, Michigan 49003
<PAGE>
[ LETTERHEAD PLANTE & MORAN, LLP ]
Independent Auditor's Report
To the Directors and Stockholders
Prab, Inc.
We have audited the accompanying consolidated balance sheet of Prab, Inc. and
subsidiary as of October 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended, as listed in the index at item 7 (a) These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Prab, Inc. and subsidiary at October 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Plante & Moran, LLP
-----------------------
PLANTE & MORAN, LLP
Kalamazoo, Michigan
December 11, 1998
<PAGE>
Prab, Inc.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31
-----------------------
1998 1997
---------- ----------
Assets
<S> <C> <C>
Current Assets
Cash $ 51,621 $ 26,235
Accounts receivable, net of allowance for doubtful
accounts of $48,248 in 1998 and $42,094 in 1997 3,367,308 3,364,163
Inventories (Note 2) 1,413,078 1,367,463
Deferred income taxes (Note 8) 431,296 290,000
Other current assets 117,148 206,068
---------- ----------
Total current assets 5,380,451 5,253,929
Property, Plant and Equipment (Note 3) 1,085,202 1,041,231
Other Assets
Deferred charges, net of accumulated amortization
of $8,304 in 1998 and $4,451 in 1997 (Note 1) 17,353 21,206
Deferred income taxes (Note 8) 381,704 523,000
Other assets 116,701 102,364
---------- ----------
Total other assets 515,758 646,570
---------- ----------
Total assets $6,981,411 $6,941,730
========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
- -----------------------------------------------------------------------------
Consolidated Balance Sheet
<TABLE>
<CAPTION>
October 31
-----------------------
1998 1997
---------- ----------
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities
Notes payable - Bank (Note 5) $ 200,000 $ 450,000
Current portion of long-term debt (Note 4) 360,000 360,000
Accounts payable 986,312 1,113,251
Customer deposits 342,282 445,897
Salaries, wages and vacation 475,270 423,801
Commissions 377,980 359,380
Other accrued expenses 378,993 363,305
---------- ----------
Total current liabilities 3,120,837 3,515,634
Long-term Debt - Related Parties -- 367,840
Long-term Debt (Note 4) 420,000 972,977
Deferred Compensation (Note 6) 17,183 16,039
Stockholders' Equity
Convertible preferred stock (Note 11) - $.75 par value:
Authorized - 2,000,000 shares
Issued and outstanding - 366,667 shares
at October 31, 1998 and 1997 275,000 275,000
Common stock - $.10 par value:
Authorized - 7,000,000 shares
Issued and outstanding - 1,757,339 shares
at October 31, 1998 and 1997 175,734 175,734
Additional paid-in capital 1,161,828 709,467
Retained earnings since November 1, 1995 1,810,829 909,039
---------- ----------
Total stockholders' equity 3,423,391 2,069,240
---------- ----------
Total liabilities and stockholders' equity $6,981,411 $6,941,730
========== ==========
</TABLE>
2
<PAGE>
Prab, Inc.
- -----------------------------------------------------------------------------
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended October 31
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $ 18,237,373 $ 16,914,611
Cost of Sales 11,177,529 10,015,157
------------ ------------
Gross Profit 7,059,844 6,899,454
Selling, General and Administrative Expenses 5,409,116 5,220,069
------------ ------------
Operating Income 1,650,728 1,679,385
Other Income (Expenses)
Interest expense (119,886) (286,025)
Interest income 7,214 6,145
Other 127 --
------------ ------------
Income - Before income taxes and extraordinary item 1,538,183 1,399,505
Income Tax Expense (Note 8) 539,631 500,978
------------ ------------
Net Income Before Extraordinary Item 998,552 898,527
Extraordinary Item - Loss on retirement of subordinated
debt, net of income tax benefit of $39,931 (Note 4) 77,512 --
------------ ------------
Net Income $ 921,040 $ 898,527
============ ============
Earnings per Common and Common Share Equivalent
Basic $ 0.51 $ 0.50
============ ============
Diluted $ 0.41 $ 0.41
============ ============
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
Prab, Inc.
- -----------------------------------------------------------------------------
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock Additional Total
--------------------------- ----------------------- Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - November 1, 1996 366,667 $ 275,000 1,757,339 $ 175,734 $ -- $ 27,012 $ 477,746
Convertible preferred stock
dividends (Note 11) -- -- -- -- -- (16,500) (16,500)
Recognition of income
tax recoveries
subsequent to a quasi-
reorganization (Note 1) -- -- -- -- 709,467 -- 709,467
Net income -- -- -- -- -- 898,527 898,527
------- ----------- --------- ----------- ----------- ----------- -----------
Balance - October 31, 1997 366,667 275,000 1,757,339 175,734 709,467 909,039 2,069,240
Convertible preferred stock
dividends (Note 11) -- -- -- -- -- (19,250) (19,250)
Recognition of income
tax recoveries
subsequent to a quasi-
reorganization (Note 1) -- -- -- -- 452,361 -- 452,361
Net income -- -- -- -- -- 921,040 921,040
------- ----------- --------- ----------- ----------- ----------- -----------
Balance - October 31, 1998 366,667 $ 275,000 1,757,339 $ 175,734 $ 1,161,828 $ 1,810,829 $ 3,423,391
======= =========== ========= =========== =========== =========== ===========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
Prab, Inc.
- -----------------------------------------------------------------------------
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended October 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 921,040 $ 898,527
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 182,679 175,022
Amortization of discounts on subordinated notes 1,740 18,687
Bad debt expense 31,558 10,880
Deferred taxes 452,361 475,832
Loss on retirement of subordinated debt 117,443 --
(Increase) decrease in assets:
Accounts receivable (34,703) (646,536)
Inventories (45,615) (224,007)
Other current and noncurrent assets 74,583 (252,685)
Increase (decrease) in liabilities:
Accounts payable (126,939) 124,816
Customer deposits (103,615) 256,710
Accrued expenses 85,757 107,863
Deferred compensation 1,144 1,099
----------- -----------
Net cash provided by operating activities 1,557,433 946,208
Cash Flows from Investing Activities
Purchase of equipment (222,797) (280,840)
Cash Flows from Financing Activities
Repayment of short-term debt (250,000) (454,000)
Payments on long-term debt (1,040,000) (660,000)
Payment of dividends (19,250) (16,500)
----------- -----------
Net cash used in financing activities (1,309,250) (1,130,500)
----------- -----------
Net Increase (Decrease) in Cash 25,386 (465,132)
Cash - Beginning of year 26,235 491,367
----------- -----------
Cash - End of year $ 51,621 $ 26,235
=========== ===========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
Prab, Inc.
- -----------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1998 and 1997
Note 1 - Nature of Business and Significant Accounting Policies
Prab, Inc. and subsidiary (the "Company") is engaged in the
manufacturing of metal scrap reclamation systems and conveyor
equipment. Major customers are in the metal working, chemical,
pharmaceutical, and food processing industries throughout the United
States, Canada, Mexico, Asia, and Europe. Sales outside the United
States were approximately 11 percent of total sales in 1998 and 17
percent of total sales in 1997. Accounts receivable generated from
foreign sales totaled approximately $595,000 as of October 31, 1998.
Basis of Consolidation - Effective November 1, 1988, the Company
formed a wholly-owned subsidiary, Prab Limited, to conduct certain
of its operations. The subsidiary is essentially inactive at the
present time. The consolidated financial statements include the
accounts of Prab, Inc. and its subsidiary, after elimination of all
significant intercompany transactions and accounts.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined by the last-in, first-out (LIFO) method.
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost. Costs for maintenance and repairs are charged to
expense when incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets.
Warranties - The Company's products are generally under warranty
against defects in material and workmanship for a period of one
year. The Company has established a reserve of $136,312 and $156,244
at October 31, 1998 and 1997, respectively, for these anticipated
future warranty costs.
Advertising - Advertising expense was $440,616 and $435,460 for the
years ended October 31, 1998 and 1997, respectively, mostly for trade
shows and publications.
6
<PAGE>
Note 1 - Nature of Business and Significant Accounting Policies
(Continued)
Net Income Per Common and Common Equivalent Share - The Company
calculates earnings per share according to the provisions of SFAS
128. The earnings per share amounts disclosed in the 1997 financial
statements have been restated to reflect the provisions of SFAS 128.
A reconciliation of net income to net income available to common
shareholders is as follows:
<TABLE>
<CAPTION>
1998 1998 1997 1997
----------- ----------- ----------- -----------
Basic Diluted Basic Diluted
Earnings Earnings Per Earnings Earnings Per
Per Share Share Per Share Share
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 921,040 $ 921,040 $ 898,527 $ 898,527
Dividends on convertible preferred stock (19,250) -- (16,500) --
----------- ----------- ----------- -----------
Net income available to common shareholders $ 901,790 $ 921,040 $ 882,027 $ 898,527
=========== =========== =========== ===========
Common and common equivalent shares outstanding 1,757,339 2,255,112 1,757,339 2,197,971
=========== =========== =========== ===========
Earnings per common and common equivalent shares $ 0.51 $ 0.41 $ 0.50 $ 0.41
=========== =========== =========== ===========
</TABLE>
A reconciliation of common and common equivalent shares outstanding
is as follows:
<TABLE>
<CAPTION>
1998 1998 1997 1997
----------- ----------- ----------- -----------
Basic Diluted Basic Diluted
Earnings Earnings Per Earnings Earnings Per
Per Share Share Per Share Share
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of outstanding common shares 1,757,339 1,757,339 1,757,339 1,757,339
Incremental shares from outstanding options dated 12/14/89 -- 4,605 -- --
Incremental shares from outstanding options dated 02/22/91 -- 50,954 -- 37,094
Incremental shares from outstanding options dated 10/23/91 -- 33,373 -- 6,719
Incremental shares from outstanding options dated 05/26/94 -- 36,406 -- 30,152
Incremental shares from outstanding options dated 11/19/94 -- 5,768 -- --
Incremental shares from convertible preferred stock -- 366,667 -- 366,667
--------- --------- --------- ---------
Common and common equivalent shares outstanding 1,757,339 2,255,112 1,757,339 2,197,971
========= ========= ========= =========
</TABLE>
There are no securities that could potentially dilute earnings per
share in the future that are not considered above. There is no
individual income effects from the securities noted above.
7
<PAGE>
Note 1 - Nature of Business and Significant Accounting Policies
(Continued)
Deferred Charges - Deferred charges include $25,657 in costs for the
issuance of debt related to the redemption of stock on October 31,
1998. These costs will be amortized according to the effective
interest method over a period of 5 years. Amortization related to
these deferred charges totaled $8,304 and $4,451 for the years ended
October 31, 1998 and 1997, respectively.
Elimination of Deficit in Retained Earnings - On October 31, 1995,
the Company eliminated the earnings deficit amount on its balance
sheet through a quasi-reorganization in accordance with the state
laws of Michigan. The capital surplus (additional paid-in capital)
was used to eliminate in its entirety a deficit of $4,228,988 in the
balance sheet under stockholders' equity. Retained earnings shown on
the balance sheet reflects earnings since November 1, 1995.
Income tax recoveries of temporary differences and carryforwards
that had not been recognized as of the date of the
quasi-reorganization that are recognized in subsequent years are
added directly to additional paid-in capital. Such income tax
recoveries were approximately $452,000 in 1998 and $709,000 in 1997.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Labor - Approximately 50 percent of the Company's
workforce is subject to a collective bargaining agreement. The
collective bargaining agreement expires October 31, 2001.
Stock Options - The Company has three stock option plans (see Note
7). The Company accounts for its stock options using the intrinsic
value method. Under that method, compensation expense is recognized
to the extent the fair value of the common stock exceeds the
exercise price of the options at the date the options are granted.
Under the Company's plans, the exercise price of options granted
must equal or exceed the value of the stock at the grant date.
Accordingly, no amounts are recorded as compensation expense for
options granted.
8
<PAGE>
Note 2 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $1,036,846 $ 938,863
Work in process 208,214 348,597
Finished goods and display units 168,018 80,003
---------- ----------
Total inventories $1,413,078 $1,367,463
========== ==========
</TABLE>
Inventories are stated at the lower of cost, determined by the LIFO
method, or market. If the FIFO method had been used for the entire
consolidated group, inventories, after an adjustment to the lower of
cost or market, would have been approximately $1,800,000 and
$1,760,000 at October 31, 1998 and 1997, respectively.
Note 3 - Property, Plant and Equipment
Cost of property, plant and equipment and depreciable lives are
summarized as follows:
<TABLE>
<CAPTION>
Depreciable
1998 1997 Life--years
---------- ---------- -----------
<S> <C> <C> <C>
Land $ 28,939 $ 28,939 --
Buildings and improvements 1,762,455 1,700,063 10-30
Machinery and equipment 2,770,653 2,665,539 3-10
---------- ----------
Total cost 4,562,047 4,394,541
Less accumulated depreciation 3,476,845 3,353,310
---------- ----------
Net carrying amount $1,085,202 $1,041,231
========== ==========
</TABLE>
Depreciation expense aggregated $178,826 and $170,330 at October 31,
1998 and 1997, respectively.
9
<PAGE>
Note 4 - Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Term note payable collateralized by
essentially all assets of the Company,
bearing interest at a fixed rate of 8.25%,
due in quarterly payments of $90,000 plus
interest from January 31, 1997 through
October 31, 2001 $ 780,000 $1,140,000
Subordinated notes payable to related parties,
bearing interest at 12% -- 367,840
Subordinated notes payable, bearing interest at 12% -- 192,977
---------- ----------
Total 780,000 1,700,817
Less current portion 360,000 360,000
---------- ----------
Long-term portion $ 420,000 $1,340,817
========== ==========
</TABLE>
Minimum principal payments on long-term debt to maturity as of
October 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $360,000
2000 360,000
2001 60,000
--------
Total $780,000
========
</TABLE>
Pursuant to the term note and notes payable - bank agreements, the
Company has agreed to maintain certain levels of current assets and
tangible net worth, and maintain minimum ratios of current assets to
current liabilities and debt to tangible net worth. The Company has
also agreed not to create, incur, assume, or guarantee indebtedness,
merge, sell or lease a substantial part of the business, or make
loans.
10
<PAGE>
Note 4 - Long-term Debt (Continued)
Included in interest expense are amounts attributable to the related
party of approximately $7,000 in 1998 and $66,000 in 1997.
The 12 percent subordinated notes described above were repaid by the
Company in November 1997. Since the notes were carried at a
discount, the payoff amount of this debt exceeded its carrying
amount and an extraordinary loss on the extinguishment of the debt
was reported. The effect of this transaction for the year ended
October 31, 1998 was to decrease income by $77,512, net of the
income tax benefit of $39,931. The effect of the extraordinary item
for retirement of subordinated debt was to decrease basic and
diluted earnings per share by $.04 and $.03, respectively, after the
consideration of income taxes.
Note 5 - Note Payable - Bank
At October 31, 1998, the Company has available a $1,670,000 line of
credit under a commercial revolving note, expiring March 31, 1999,
bearing interest at .5 percent below the bank's prime rate for an
effective rate of 7.5 percent at October 31, 1998. The line of credit
is collateralized by essentially all assets of the Company.
Available borrowings are based on a formula of eligible accounts
receivable and inventory. The line of credit supports letters of
credit totaling $6,749 and $17,500 for the years ended October 31,
1998 and 1997, respectively.
11
<PAGE>
Note 6 - Pension and Profit-sharing Plans
As of October 31, 1998 and 1997, the Company is participating in a
defined benefit plan for their collective bargaining unit. The
following table sets forth the funded status of the Company's
defined benefit pension plan and amounts recognized in the balance
sheet at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of $716,824
and $691,085 in 1998 and 1997, respectively $ 824,509 $ 763,308
=========== ===========
Projected benefit obligation for service rendered to date $ (866,784) $ (763,308)
Plan assets at fair value--Primarily nongovernment
obligations and listed stock 1,096,496 1,008,752
----------- -----------
Assets in excess of projected benefit obligation 229,712 245,444
Unrecognized net gain from experience different than
that assumed or change in assumptions (277,914) (248,260)
Unrecognized prior service cost due to plan
amendment being amortized over 15 years 157,488 102,898
Unrecognized net asset at November 1, 1987
being recognized over 15 years (15,952) (20,026)
----------- -----------
Prepaid pension cost included in
other assets $ 93,334 $ 80,056
=========== ===========
</TABLE>
12
<PAGE>
Note 6 - Pension and Profit-sharing Plans (Continued)
A reconciliation of the projected benefit obligation is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Projected benefit obligation - Beginning of year $ (763,308) $ (730,386)
Actuarial gain during year 11,488 11,165
Service cost (19,701) (19,447)
Interest cost (51,570) (49,406)
Distributions to plan participants 27,894 24,766
Plan amendment effective November 1, 1998 (71,587) --
----------- -----------
Projected benefit obligation - End of year $ (866,784) $ (763,308)
=========== ===========
</TABLE>
A reconciliation of fair value of plan assets is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Fair value of plan assets - Beginning of year $ 1,008,752 $ 810,790
Contributions -- 43,245
Distributions to plan participants (27,894) (24,766)
Actual return on plan assets 115,638 179,483
----------- -----------
Fair value of plan assets - End of year $ 1,096,496 $ 1,008,752
=========== ===========
</TABLE>
Pension expense included the following components:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Service cost - Benefits earned during the year $ 19,701 $ 19,447
Interest cost on projected benefit obligation 51,570 49,406
Expected return on plan assets (83,714) (67,873)
Amortization of unrecognized transition asset (4,074) (4,074)
Amortization of unrecognized (gains) and losses (13,758) (5,744)
Amortization of prior service cost 16,997 5,936
----------- -----------
Net periodic pension cost $ (13,278) $ (2,902)
=========== ===========
</TABLE>
13
<PAGE>
Note 6 - Pension and Profit-sharing Plans (Continued)
The discount rate used in determining the actuarial present value of
the projected benefit obligation was 7 percent for 1998 and 1997.
The expected long-term rate of return on assets was 8 percent for
1998 and 1997.
The Company contributed $0 in 1998 and $43,245 in 1997 to the
pension plan for hourly employees covered by its collective
bargaining agreement. The Company's policy is to make annual
contributions as required by applicable regulations.
The Company's salaried employees profit-sharing plan is a
combination defined contribution profit-sharing and 401(k) plan. The
profit-sharing plan covers substantially all employees of the
Company other than those covered by the collective bargaining
agreement. The profit sharing plan provides for an annual
contribution of not less than 5 percent of the Company's income
before income taxes, proceeds from life insurance policies and gain
on sale of capital assets. Contributions for the profit-sharing plan
are used to buy Company stock. The stock under this plan is
allocated to salaried employees based on their pro-rata
compensation. Salaried employees vest in the shares of the Company
based on a 5 year schedule, 10 percent in year 1, 20 percent in year
2, 40 percent in year 3, 70 percent in year 4, and 100 percent in
year 5. As of October 31, 1998, there were approximately 190,000
shares held in the plan. Contributions made by the Company in
accordance with the profit-sharing plan were approximately $73,000
in 1998 and $72,000 in 1997. Employer matching contributions are
made to the 401(k) plan in an amount equal to 25 percent of the
lessor of: the amount designated by the employee for withholding and
contribution to the 401(k) plan; or 4 percent of the employee's
total compensation. In addition, the Company will make a
contribution equal to 1 percent of each eligible employee's
compensation who is employed on the last day of the plan year and
who performs 1,000 or more hours of service for the Company during
the plan year. The cost of this plan was approximately $40,000 and
$32,000 in 1998 and 1997, respectively.
14
<PAGE>
Note 6 - Pension and Profit-sharing Plans (Continued)
During the year ended October 31, 1993, the Company adopted a union
401(k) plan. The plan covers all employees of the Company covered by
the collective bargaining agreement. Participation in the 401(k)
plan is optional. Employer matching contributions are made to the
401(k) plan in an amount equal to 25 percent of the lessor of: the
amount designated by the employee for withholding and contribution
to the 401(k) plan; or 4 percent of employee's total compensation.
Contributions to the plan totaled $10,237 and $10,537 for the years
ended October 31, 1998 and 1997, respectively.
The Company has entered into deferred compensation and salary
continuation agreements with a key employee calling for periodic
payments totaling $48,000 at retirement or death of the employee.
The normal retirement date occurs during 2012. The liability has
been recorded using the present value method.
Note 7 - Stock Option Plan
The Company maintains qualified and nonqualified stock option plans
that provide for granting of options on common stock by the Board of
Directors to officers and key employees. The plans had 226,500
shares reserved for issuance as noted below. All options under the
plan have been issued.
Transactions involving the plans for years ended October 31, are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Weighted Weighted
Average Average
Option Exercise Option Exercise
Shares Price Shares Price
------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding - Beginning of year 207,500 $1.18 207,500 $1.18
Granted 20,000 2.13 -- --
Canceled (1,000) 2.37 -- --
------- ----- ------- -----
Outstanding - End of year 226,500 $1.26 207,500 $1.18
======= ===== ======= =====
Eligible for exercise at end of year 226,500 $1.26 207,500 $1.18
======= ===== ======= =====
</TABLE>
15
<PAGE>
Note 7 - Stock Option Plan (Continued)
<TABLE>
<CAPTION>
Weighted
Outstanding Expiration Average
Option shares Issue Date Date Exercise Price
- ------------- ---------- ---------- --------------
<S> <C> <C> <C>
22,500 12/14/89 12/14/99 $2.3750
70,000 02/22/91 02/22/01 0.8125
70,000 10/23/91 10/23/01 1.5625
45,000 05/26/94 05/26/04 0.5703
20,000 11/19/97 11/19/07 2.1250
</TABLE>
The stock options are exercisable from the date issued and expire on
various dates through 2007. The exercise price equals the market
value of all options granted and, therefore, none of the options
involved compensation expense.
The option holders have agreed not to exercise their options for a
period of three years from October 31, 1996.
The weighted average fair value of options granted during 1998 was
$.75 per share. In determining the value of the options granted, the
Company assumed a risk free interest rate of 6 percent, an expected
option term of approximately 2 years, no dividends and volatility of
approximately 50 percent, based on 5 years of the Company's stock
price history.
Had the Company used the fair value method of accounting for its
stock options, its net income and earnings per share would have been
reduced by approximately $15,000 and $.01 (per share diluted),
respectively. Use of the fair value method would have no impact on
1997 net income or earnings per share.
16
<PAGE>
Note 8 - Income Taxes
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current expense $ 47,339 $ 25,146
Deferred expense 452,361 475,832
----------- -----------
Total income tax expense 499,700 500,978
Tax benefit allocated to extraordinary item 39,931 --
----------- -----------
Income taxes before extraordinary item $ 539,631 $ 500,978
=========== ===========
</TABLE>
A reconciliation of income tax expense on pretax income before
extraordinary item at statutory rates to income tax expense at the
Company's effective rate is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Taxes computed at statutory rates $ 522,982 $ 475,832
Tax effect related to extraordinary item (39,931) --
State income taxes, net of federal benefit 9,454 11,108
Nondeductible expenses and other adjustments 7,195 14,038
----------- -----------
Total income tax expense $ 499,700 $ 500,978
=========== ===========
</TABLE>
The details of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Total deferred tax assets $ 1,107,677 $ 1,550,264
Total deferred tax liabilities (60,762) (50,988)
Valuation allowance on deferred tax assets (233,915) (686,276)
----------- -----------
Net deferred tax asset $ 813,000 $ 813,000
=========== ===========
</TABLE>
17
<PAGE>
Note 8 - Income Taxes (Continued)
The following items affected deferred taxes during the years ended
October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforward $(528,298) $(491,027)
Alternative minimum tax 31,000 28,000
Depreciation (9,774) 1,144
Expenses not currently deductible for tax purposes
(expenses deductible for tax purposes but not
against financial statement income) 54,711 (13,949)
--------- ---------
Total deferred tax expense (452,361) (475,832)
Tax recoveries reported as additions to paid-in
capital - Change in valuation allowance 452,361 709,467
--------- ---------
Increase in net deferred tax asset $ -- $ 233,635
========= =========
</TABLE>
The deferred tax liabilities result from using accelerated
depreciation for tax purposes. Deferred tax assets result from
expenses not deductible for tax purposes until paid, alternative
minimum tax credits and net operating loss carryforwards. For tax
purposes, the Company has net operating loss carryforwards of
approximately $2,265,000 that expire at various times through 2008
and alternative minimum tax credit carryforwards of approximately
$75,000 that do not expire. These carryforwards, net of a valuation
allowance, have been used to reduce deferred taxes for financial
reporting purposes. The valuation allowance was provided at
October31, 1998 and 1997 to reduce deferred tax assets to an amount
management reasonably expects can be recognized in the future based
on facts available at that time.
Under the Internal Revenue Code, a change in ownership in excess of
50 percentage points limits or eliminates the right to use the net
operating loss carryforward as an offset to taxable income and
unused credit carryovers to reduce federal tax liabilities. On
October 30, 1992 and October 31, 1996, the Company undertook
restructuring transactions that involved a change in ownership.
While the Company believes it is not subject to any such limitation
as a result of these transactions, any additional ownership change
or an adverse decision by the Internal Revenue Service regarding the
restructuring could result in a limitation.
18
<PAGE>
Note 9 - Related Party Transactions
A director of the Company is affiliated in an "of counsel" capacity
with the law firm that has been general legal counsel to the Company
since 1961. The Company incurred legal fees of $32,442 and $24,746
to the law firm in 1998 and 1997, respectively.
Note 10 - Cash Flows
Cash paid during the years ended October 31, 1998 and 1997 for
interest approximated interest expense. A total of $17,878 and
$25,146 were paid for alternative minimum income taxes during the
years ended October31, 1998 and 1997, respectively.
There were no significant noncash financing or investing activities
during 1998 and 1997.
Note 11 - Preferred Stock
Convertible Preferred Stock
The convertible preferred stock is entitled to quarterly dividends
as follows:
<TABLE>
<S> <C> <C>
November 1, 1996 to October 31, 1997 6% per annum ($.0450 per share)
November 1, 1997 to October 31, 1998 7% per annum ($.0525 per share)
November 1, 1998 and thereafter 8% per annum ($.0600 per share)
</TABLE>
The Company has the option to pay the dividend in cash or common
stock. The Company's ability to pay cash dividends is subject to
Michigan statutes. If a dividend is paid in common stock, the
Company would have an obligation to register the stock.
The Company has the right to redeem the convertible preferred stock
at $.75 per share. Upon the Company's offer to redeem the
convertible preferred stock, the preferred stockholder has the right
to convert these shares to common. Additionally, the holder of the
convertible preferred stock has the right to convert all, or any
portion, of the convertible preferred stock to common stock on a one
to one ratio. After November 1, 1994, the convertible preferred
stockholder will have a 60 day period after tender of a Company
redemption payment to elect to convert to common stock in lieu of
redemption.
19
<PAGE>
Note 11 - Preferred Stock (Continued)
The convertible preferred stockholders are entitled to vote as a
class to elect one member of the Board of Directors of the Company.
The convertible preferred stock has a liquidation priority over
common stock of $.75 per share plus any accrued but unpaid
dividends.
Nonconvertible Preferred Stock - There are 600,000 shares of
.50(cent) par nonconvertible preferred stock authorized. Holders of
the nonconvertible preferred stock would be entitled to quarterly
cash dividends equal to 8 percent per annum ($.040 per share) from
November 1, 1997 to October 31, 1998, and 9 percent per annum ($.045
per share) thereafter. As of October31, 1998, there were no shares
of nonconvertible preferred stock issued and outstanding.
20
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER
Description of Exhibit
3(i). Second Restated Articles of Incorporation of the Company, as
amended, incorporated herein by reference to Exhibit 3(i) of the
Company's Form 8-A/A (Amendment No.1) dated May 25, 1995.
3(ii). By-Laws of the Company as amended incorporated herein by reference
to Exhibit 3(ii) of the Company's Form 8-A/A (Amendment No.1) dated
May 25, 1995.
4a. $77,500 Subordinated Capital Note dated October 31, 1996 from the
Company to Gary A. Herder (except for varying principal amounts, the
terms of Mr. Herder's Subordinated Capital Note are identical to the
terms of all other Subordinated Capital Notes issued by the Company
in the aggregate principal amount of $680,000 on October 31, 1996)
incorporated herein by reference to Exhibit 4a of the Company's Form
8-K dated October 31, 1996.
4b. $1,800,000 Commercial Term Note dated October 31, 1996 from the
Company to FMB-Arcadia Bank (now known as The Huntington National
Bank) incorporated herein by reference to Exhibit 4b of the
Company's Form 8-K dated October 31, 1996.
4c. Security Agreement with Addendum dated October 31, 1996 from the
Company to FMB-Arcadia Bank (now known as The Huntington National
Bank) incorporated herein by reference to Exhibit 4c of the
Company's Form 8-K dated October 31, 1996.
4d. Future Advance Mortgage dated October 30, 1992 from the Company to
FMB-Arcadia Bank (now known as The Huntington National Bank),
together with Amendment to Mortgage dated October 31, 1996
incorporated herein by reference to Exhibit 4d of the Company's Form
8-K dated October 31, 1996.
4e. Addendum to Commercial Term Note dated October 31, 1996 executed
December 4, 1997.
4f. Addendum to Security Agreement dated October 31, 1996 executed
March 9, 1998.
10a. Deferred Compensation and Salary Continuation Agreement between the
Company and Gary A. Herder dated September 13, 1976 incorporated by
reference to Exhibit 19b. of the Company's Form 10-K for the fiscal
year ended October 31, 1987.
10b. Prab Robots, Inc. 1988 Stock Option Plan incorporated by reference
to Exhibit "C" of the Company's Definitive Proxy Statement for the
1988 Annual Meeting.
10c. Registration Rights and Shareholders Agreement, dated October 30,
1992, between the Company and State Treasurer of the State of
Michigan, custodian for certain retirement systems incorporated
herein by reference to Exhibit 4e of the Company's Form 8-K dated
November 13, 1992, as amended by First Amendment to Registration
Rights and Shareholders Agreement dated
<PAGE>
October, 1994 incorporated herein by reference to Exhibit 4c. 2 of
the Company's Form 10-KSB for the fiscal year ended October 31,
1994.
21. List of Subsidiaries.
24a. Power of Attorney for William G. Blunt
24b. Power of Attorney for John W. Garside
24c. Power of Attorney for Gary A. Herder
24d. Power of Attorney for James H. Haas
24e. Power of Attorney for John J. Wallace
27. Financial Data Schedule
Exhibit 4e
----------
FMB
Arcadia Bank
ADDENDUM TO COMMERCIAL TERM NOTE #842540-7042 (60027042)
DATED OCTOBER 31, 1996
FROM PRAB, INC.
("Debtor")
TO FMB-ARCADIA BANK
(the "Bank")
INCORPORATION AND CONFLICT
The provisions of this Addendum are hereby made a part of a
Commercial Term Note described above. In the event of a conflict between the
terms of this Addendum and the terms of such Note, the terms of this Addendum
shall control. If the date of signing of this Addendum is later than the date
of signing of any other Addendum to such Commercial Term Note, this Addendum
shall supersede and replace such prior Addendum.
ADDITIONAL PROVISIONS
Interest shall accrue at a rate of eight and one-quarter percent
(8.25%) per annum beginning December 4, 1997.
Date of Signing: December 4, 1997
Debtor(s): Prab, Inc.
/s/ Gary A. Herder
-------------------------
Gary A. Herder, President
Exhibit 4f
FMB
Arcadia Bank
ADDENDUM TO SECURITY AGREEMENT
DATED OCTOBER 31, 1996
FROM PRAB, INC.
("Debtor")
TO FMB-ARCADIA BANK
(the "Bank")
INCORPORATION AND CONFLICT
The provisions of this Addendum are hereby made a part of the
Security Agreement described above. In the event of a conflict between the
terms of this Addendum and the terms of such Security Agreement, the terms of
this Addendum shall control. If the date of signing of this Addendum is later
than the date of signing of any other addendum to such Security Agreement,
this Addendum shall supersede and replace such prior Addendum.
ADDITIONAL PROVISIONS
12. Borrowing Base. The unpaid balance of the $1,670,000.00 Note dated March
9, 1998, and all extensions, renewals and replacements thereof, including
replacements with a different principal amount (the "Base Note"), shall not
at any time exceed the sum of the following amounts, which sum is hereinafter
referred to as the "Borrowing Base."
(a) 75% of the Debtor's "Eligible Accounts Receivable"; plus
(b) 35% of the fair market value or cost (whichever is less) of
Debtor's "Eligible Inventory," not to exceed $450,000.00.
Notwithstanding any conflicting provisions contained in the Base
Note, if at any time the unpaid balance of the Base Note exceeds the
Borrowing Base, Debtor shall immediately pay to the Bank the difference,
including all accumulated interest.
13. Affirmative Covenants. Until the Liabilities are paid in full, Debtor
covenants and agrees that it will:
<PAGE>
13.1 Maintain Net Current Assets and Tangible Net Worth of not less
than the amounts during the periods specified below:
<TABLE>
<CAPTION>
Minimum Net Minimum Tangible
Time Period Current Assets Net Worth
- ----------- -------------- ----------------
<S> <C> <C> <C>
(a) from 10/31/97 0 $1,200,000.00
to 10/30/98
(b) from 10/31/98 0 $2,200,000.00
and thereafter
</TABLE>
"Net Current Assets" means "Current Assets" less "Current Liabilities."
Current Assets shall include only cash, Eligible Accounts Receivable, United
States Government Securities, and Eligible Inventory. Current Liabilities
means that portion of the Liabilities payable within a twelve-month period
and other liabilities considered current in accordance with generally
accepted accounting principles, consistently applied.
"Tangible Net Worth" means: (i) the amount of all assets which, under
generally accepted principles of accounting, consistently applied, would
appear as such on the balance sheet of Debtor, but excluding (a) intangible
items such as goodwill, treasury shares, reserves, patents, trademarks,
research and development expenses and the like (b) any write-up in the book
value of such assets resulting from a re-evaluation thereof and (c) all
receivables from and loans, advances and similar transfers to any officers,
directors or shareholders of Debtor which are due and owing to Debtor, less
(ii) liabilities, but excluding Subordinated Capital Notes, of the Debtor as
defined in accordance with generally accepted accounting principles,
consistently applied ("Debt").
"Net Worth" means: (i) the amount of all assets which, under generally
accepted accounting principles, consistently applied, would appear as such on
the balance sheet of Debtor, less (ii) all liabilities of the Debtor as
defined in accordance with generally accepted accounting principles,
consistently applied ("Debt").
13.2. Maintain the ratio of Current Assets to Current Liabilities
(as defined in subparagraph 13.1) of not less than: 1.1 to 1.0 from 10/31/97
to 10/30/98; 1.2 to 1.0 from 10/31/98, and thereafter.
13.3. Maintain the ratio of Debt to Tangible Net Worth of not more
than: 3.75 to 1.0 from 10/31/97 to 10/30/98; 2.25 to 1.0 from 10/31/98, and
thereafter.
13.4. Comply with all applicable federal, state and local laws,
ordinances, rules and regulations, including, but not limited to, all
environmental laws, ordinances, rules and regulations, all applicable
federal, state and local laws, ordinances, rules and regulations concerning
wage payments, minimum wages, overtime laws and payment of withholding taxes,
and deliver to the Bank such reports and information in form satisfactory to
the Bank as the Bank may request from time to time to establish compliance
with such laws.
13.5 Maintain all of its deposit accounts at the Bank.
14. Negative Covenants. Until the Liabilities are paid in full, Debtor
covenants and agrees that it will not:
<PAGE>
14.1 Pay, create, incur, assume or have outstanding any indebtedness
for borrowed money except the Liabilities, and amounts owing under
Subordinated Capital Notes dated October 31, 1996.
14.2 Merge with or into, or enter into a share exchange, with any
other corporation or entity, nor sell, lease, transfer or otherwise dispose
of all or any substantial part of its property, assets or business (other
than sales of inventory made in the ordinary course of business).
14.3 Enter into an agreement providing for the leasing by it of
property which has been or is to be sold or transferred by it.
14.4 Make any loans or advances to, or investments in, other
persons, corporations or entities (including, but not limited to, any
officers, directors, or shareholders of Debtor), except investments in (i)
bank certificates of deposit and savings accounts; (ii) obligations of the
United States; and (iii) prime commercial paper maturing within ninety (90)
days of the date of acquisition by Debtor.
14.5 Guarantee or become a surety or otherwise contingently liable
for any obligations of others, except pursuant to the deposit and collection
of checks and similar items in the ordinary course of its business.
14.6 Transfer any real or personal property, tangible or intangible,
to any of its subsidiaries, but not limited to, Prab Command, Inc. and Prab,
Ltd. (formerly known as Prab Robots International, Ltd.).
Date of Signing: March 9, 1998
Debtor(s): Prab, Inc.
/s/ Gary A. Herder
-------------------------
Gary A. Herder, President
Exhibit 21
List of Subsidiaries
Prab Limited (f/k/a "Prab Robots International Ltd.") an English corporation,
which subsidiary does not hold any material assets and is inactive.
Exhibit 24a.
POWER OF ATTORNEY
The person signing below hereby designates Robert W. Klinge and Eric
V. Brown, Jr., or either of them, as his Attorney-in-Fact with power to
execute on behalf of such person, in his capacity or capacities, as indicated
below, the Form 10-KSB, Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934, for Prab, Inc. for the year ended October
31, 1998, and all amendments to such Form 10-KSB.
Dated: January 22, 1999 /s/William G. Blunt
-------------------
William G. Blunt
Director
Exhibit 24b.
POWER OF ATTORNEY
The person signing below hereby designates Robert W. Klinge and Eric
V. Brown, Jr., or either of them, as his Attorney-in-Fact with power to
execute on behalf of such person, in his capacity or capacities, as indicated
below, the Form 10-KSB, Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934, for Prab, Inc. for the year ended October
31, 1998, and all amendments to such Form 10-KSB.
Dated: January 22, 1999 /s/John W. Garside
------------------
John W. Garside
Director
Exhibit 24c.
POWER OF ATTORNEY
The person signing below hereby designates John J. Wallace and Eric
V. Brown, Jr., or either of them, as his Attorney-in-Fact with power to
execute on behalf of such person, in his capacity or capacities, as indicated
below, the Form 10-KSB, Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934, for Prab, Inc. for the year ended October
31, 1998, and all amendments to such Form 10-KSB.
Dated: January 15, 1999 /s/Gary A. Herder
-----------------
Gary A. Herder, President, Principal
Executive Officer, Principal Financial
Officer and Director
Exhibit 24d.
POWER OF ATTORNEY
The person signing below hereby designates Robert W. Klinge and Eric
V. Brown, Jr., or either of them, as his Attorney-in-Fact with power to
execute on behalf of such person, in his capacity or capacities, as indicated
below, the Form 10-KSB, Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934, for Prab, Inc. for the year ended October
31, 1998, and all amendments to such Form 10-KSB.
Dated: January 22, 1999 /s/James H. Haas
----------------
James H. Haas
Director
Exhibit 24e.
POWER OF ATTORNEY
The person signing below hereby designates Robert W. Klinge and Eric
V. Brown, Jr., or either of them, as his Attorney-in-Fact with power to
execute on behalf of such person, in his capacity or capacities, as indicated
below, the Form 10-KSB, Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934, for Prab, Inc. for the year ended October
31, 1998, and all amendments to such Form 10-KSB.
Dated: January 22, 1999 /s/John J. Wallace
---------------------
John J. Wallace
Chairman of the Board
and Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 51,621
<SECURITIES> 0
<RECEIVABLES> 3,367,308
<ALLOWANCES> 0
<INVENTORY> 1,413,078
<CURRENT-ASSETS> 5,380,451
<PP&E> 4,562,047
<DEPRECIATION> 3,476,845
<TOTAL-ASSETS> 6,981,411
<CURRENT-LIABILITIES> 3,120,837
<BONDS> 0
<COMMON> 175,734
0
275,000
<OTHER-SE> 2,972,657
<TOTAL-LIABILITY-AND-EQUITY> 6,981,411
<SALES> 18,237,373
<TOTAL-REVENUES> 18,237,373
<CGS> 11,177,529
<TOTAL-COSTS> 16,586,645
<OTHER-EXPENSES> (127)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,672
<INCOME-PRETAX> 1,538,183
<INCOME-TAX> 539,631
<INCOME-CONTINUING> 998,552
<DISCONTINUED> 0
<EXTRAORDINARY> 77,512
<CHANGES> 0
<NET-INCOME> 921,040
<EPS-PRIMARY> .51
<EPS-DILUTED> .41
</TABLE>
